Week 1 Question (10 marks)
Differentiate between a sole trader, company and a partnership. Support your answer to this by citing the advantages and disadvantages of using each business structure. (10 marks)
sole trader company partnership
1.Easiest to form.
- Very limited, finances
- Least stable
- Difficult to form. Numerous legal and procedural formalities involved.
- Possible to arrange huge finances.
- Limited liability.
- Most stable. Company enjoys perpetual succession.
1.Easy to form; need to have a partnership agreement
- Finances limited; but not very limited.
- Unlimited liability
- Somewhat stable; but differences among partners may lead to dissolution of partnership
Advantages of sole trader
Control – Sole traders maintain full control of their business. Running it how they please without the interference of others.
Profit retention – Sole traders retain all the profits of their business.
Private data – Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies House.
Disadvantages of sole trader
Liability – sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business.
Finance – sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future.
Decision making – all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person.
Advantages of a Company
- Limited Liability:
The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held by them or guarantee given by them.
- Perpetual Existence:
Deaths, insanity, insolvency of shareholders or directors do not affect the company’s existence. A company has a separate legal entity with perpetual succession.
- Transferability of Shares:
If the shareholders of a company are displeased with the progress of the business, they can sell their shares any time. During all this change of ownership, the business continues to operate.
Disadvantages of a Company
Compared to proprietorship and partnership, a company has to comply with more legal requirements. It consumes considerable time and effort.
- Management Mischief’s:
Sometimes the managers and directors misuse the company resources for their personal benefits. This brings losses to the company and company is closed.
- Lack of Secrecy:
As per the legal provisions, a company has to make various statements available to the Registrar of the Companies, Financial Institutions; the secrecy of business comes down. It is further reduced when the company provides its annual report to the shareholders as the competitors do also find out the details of all financial data.
Advantages of Partnership
Less formal with fewer legal obligations
One of the main advantages of a partnership business is the lack of formality compared with managing a limited company.
The accounting process is generally simpler for partnerships than for limited companies. The partnership business does not need to complete a Corporation Tax Return, but you’ll still need to keep records of income and expenses.
Easy to get started
The partners can agree to create the partnership verbally or in writing. There’s no need to register with Companies House and registering the business partnership for taxation with HMRC is quite simple. The partners will also individually need to register for self assessment, which they can do online.
Sharing the burden
Compared to operating on your own as a sole trader, by working in a business partnership you can benefit from companionship and mutual support. Starting and managing a business alone can feel stressful and daunting, particularly if you’ve not done it before. In a partnership, you’re in it together.
Disadvantages of Partnership
The business has no independent legal status
A business partnership has no independent legal existence distinct from the partners. By default, unless a partnership agreement with alternative provisions is put in place, it will be dissolved upon the resignation or death of one of the partners. This possibility can cause insecurity and instability, divert attention from developing the business and will often not be the preferred outcome of the remaining partners.
Again because the business does not have a separate legal personality, the partners are personally liable for debts and losses incurred. So if the business runs into trouble your personal assets may be at risk of being seized by creditors, which would generally not be the case if the business was a limited company.
Limited access to capital
While a combination of partners is likely to be able to contribute more capital than a sole trader, a partnership will often still find it more difficult to raise money than a limited company.
Week 2 Question (10 marks)
Teresa and Alison operate a partnership making and selling jam. A reduced supply of fruit has resulted in a fall in sales. Alison purchased a large supply of glass jars that must be paid for within 30 days. The funds are not available to meet this expense. Teresa was not consulted when Alison bought the jars and insists that Alison pay for them out of her personal savings. What do you think will be the legal consequences here resulting from Teresa’s decision not to consult Alison? (10 marks)
According to the law, partners in a general partnership are personally liable for the company. You are personally responsible for business debt and lawsuits. Generally, every partner in a partnership has unlimited liability for all of the partnership’s debts. In this case Teresa’s decision to purchase a large supply of glass jars was not for personal use but for the business. In partnership both parties agree to share profits and losses. Therefore, both Teresa and Alison are liable for the debt and not only Teresa.
Generally, a partnership is an agreement between two people who agree to come together to start and operate a business. The partners agree to share loses and profits of the business. In a general partnership, parties have unlimited liability for all the partners debts, therefore both Teresa and Alison are liable for the debt.
Week 4 Question (10 marks)
When can the corporate veil be lifted under the Corporations Act to make directors liable for corporate debts? (10 marks)
Lifting the corporate veil refers to the possibility of looking behind the company framework (or behind the company’s separate personality) to make the member liable, as an exception to the rule that they are normally shielded by the corporate shell; that is they are not liable to outsiders at all, and are only normally liable to pay the company what they agreed to pay by way of share purchase price or guarantee.
If a one man company for example, is completely under resourced and unable to meet its trading debts, but it’s one man owner is personally wealthy, can the company’s creditors claim against the owner shareholder? The answer is also no as was seen is Salamon vs Salamon. The ruling from the Salomon case lies at the heart of corporate personality and is in principal, the difference between companies and partnerships. There are some situations where the courts look beyond the personality to members or directions of companies, by doing this the courts are said to lift or pierce the corporate veil.
Week 3 Question (10 marks)
Provide a case summary of the case “Salomon v Salomon & Co Ltd ” using the IRAC method.
What was the significance of this case law in relation to the legal concept of separate legal entity?
Salomon & Co Ltd was a company in which Salomon was the large part shareholder. He was sought to be made liable for the company’s debt by creditors during the liquidation process. Ultimately it was needed to find whether a shareholder could be held liable for a company’s debt over and above his/her capital contribution and whether he/she could be exposed to unlimited personal liability, regardless of the separate legal identity of a company.
The Court of Appeal, had reasoned that Salomon formed the company against the true intent of the then Companies Act, 1862, and had conducted the business as an agent of Salomon, who should, therefore, be held responsible for the debt incurred in the course of such agency. The ruling decaled the comapny is not real.
Later, during an applead, they reversed the above ruling, and collectively decaled that, it is an individual with its rights and liabilities applicable to itself, and “the motives of those who took part in the promotion of the company are irrelevant in discussing what those rights and liabilities are”.1 The legal fiction of “corporate veil” between the company and its owners/controllers2 was firmly created by the Salomon case.
The most striking consequence of SLP is that a company survives the death of its members.3 The legal action of corporate veil, affirm that a company has a legal personality independent from the identity of its shareholders.4 Any rights, obligations or liabilities of a company are distinct from those of its shareholders, the shareholders are responsible only to the extent of their capital contributions, known as “limited liability”.5 As companies can then sue and be sued on its own name, it facilitates legal course too.6 This corporate fiction was devised to enable groups of individuals to pursue an economic purpose as a single unit, without exposure to risks or liabilities in one’s personal capacity.7 And finally, a company can own property, execute contracts, raise debt, make investments and assume other rights and obligations, independent of its members.8
Salomon ruling is one of the predominant ruling and continues to establish English company law. While forgery, giving False front and fraudularity mainly impose the implication of the veil piercing exception in limited circumstances, these cases are not complete. Much is left to the discretion and interpretation of the courts on case-to-case basis.
Week 5 Question (10 marks)
Provide a case summary of the case “Lee v Lee’s Air Farming Ltd  UKPC 33” using the IRAC method. What legal principle came out of this case in relation to why the court lifted the corporate veil in this case? (10 marks)
This case is related to the corporate veil and separate legal concern.
As per the definition of company, company is a separate legal concern in the eyes of law and it can be sued or can sue by its own name.
In the present case of Lee v Lee’s Air farming Ltd  UKPC 33
Catherine Lee’s husband Geoffrey Lee formed the company through Christ church accountants, which worked in caterbury , Newzealand, The main business of this company is to spread fertilizers from the air. Mr. Lee was the sole director and chief pilot of the company and also held 2999 shares out of 3000. Unfortunately, he was killed in a plane crash. The company was insured for worker compensation and Mrs Lee claimed 2430 pounds under the workers compensation act 1922 for the death of her husband.
Firstly the case was listen by the court of appeal of New Zealand and court said that Lee could not be a worker when he itself is an employer and there is a lack of relationship between employer and employee , master and servant which is an essential condition for a worker, and so Mrs Lee is not entitled to compensation.
Later on the Privy council advised that Mrs Lee is entitled to compensation on the ground that there is a possibility to became a form a contract with the company by Mr Lee as company is a separate legal person in the eyes of law.
It is being held that mere acting in the capacity of director does not mean that he is the employer, company is totally different and having its legality separate from its shareholders, directors etc in managerial capacity. So, mere forming a company does not mean that company is known by him there can an arrangement of contract between director and company, so Mrs Lee must be compensated and Mr Lee treated as a worker under the workers compensation act.
Conclusion: – It is hereby concluded from the facts of the case that company is a separate legal concern in the eyes of law, but depends upon case by case whether there is a necessary evidence for corporate veil . so, its depends upon the facts of the cases to use the concept related to the corporate veil or not, mere dealing on behalf of company does not mean to apply the concept of corporate veil and company can be always seen in the separate legal position only.
1 Ibid 30-31 (Lord Halsbury LC). See also, Gas Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue, 1923 AC 723 (Lord Sumner).
2 Jennings v Crown Prosecution Service, 2008 UKHL 29.
3 Re Noel Tedman Holdings Pty Ltd., 1967 Qdr 561. See also, Mayson, French & Ryan, Company Law (29th edn, OUP 2012).
4 Murray A. Pickering, ‘The Company as a Separate Legal Entity’ (1968) 31 Mod. L. Rev. 481.
5 P.W. Ireland, ‘The Rise of the Limited Liability Company’ (1984) 12 International Journal of the Sociology of Law 239.
6 Metropolitan Saloon Omnibus Co. Ltd. v Hawkins, (1859) 4 Hurl & N 87.
7 Ayton Ltd. v Popely, (2005) EWHC 810 (Ch).